Home ForexForecasts Week ahead: ECB and BoJ meetings in focus

Week ahead: ECB and BoJ meetings in focus

by SuperiorInvest
  • Japanese yen loses ground ahead of Bank of Japan decision on Tuesday
  • ECB meets on Thursday: will it counter bets on a rate cut?
  • The Bank of Canada also decides, while the US publishes GDP statistics

Bank of Japan unlikely to rescue battered yen

The Japanese yen started the new year on the wrong foot, losing 5% of its value against the US dollar in the space of three weeks, as cooling inflation and a sharp slowdown in wage growth convinced investors to that the Bank of Japan will delay its plans to exit negative interest rates.

Market prices have long suggested that the Bank of Japan would end negative rates in April. However, traders have now pushed back the timing of this move to July, dealing a blow to the yen.

Bank of Japan officials are unlikely to change things when they meet on Tuesday. Governor Ueda has already downplayed the prospect of raising rates, s
insisting that there is no rush. The pulse of economic data has weakened further since he made those comments, so the Bank of Japan will most likely maintain a cautious stance.

In fact, some media reports suggest that the BoJ will cut its inflation forecasts for this year. That would indicate even less urgency to normalize politics, which in turn could keep the yen under pressure.

In terms of data, inflation statistics from Tokyo will hit the markets on Friday.

Will the ECB reject rate cuts?

In the euro zone, the European Central Bank’s decision will take center stage on Thursday. Market prices suggest that the central bank will do nothing, so the action will mainly come from President Lagarde’s comment.

Several ECB officials have recently tried to quell speculation about imminent rate cuts. Markets are currently assigning an 85% probability that the ECB will cut rates in April, but several policymakers, including Lagarde, have warned that it is too soon and are pointing to a rate cut in the summer.

If the ECB presses this message next week, the euro could rise briefly as some bets on rate cuts are undone. That said, it could be difficult for the single currency to sustain any gains, amid stagnant economic growth. With business surveys warning of a technical recession, the outlook for the euro looks bleak overall.

Speaking of business surveys, the next batch will be published on Wednesday, a day before the ECB decision.

The Bank of Canada decides and the US publishes GDP data

In Canada, the central bank will announce its own decision on Wednesday. Markets assign a 15% probability to an immediate rate cut, so this will be an interesting development.

The Canadian economy has been showing mixed signals lately. With rising wages and record levels of immigration driving up house prices, there are concerns that inflation could remain elevated for some time.

However, core inflation has declined sharply, falling to 2.6% on an annual basis in December. The BoC aims to keep inflation in a target range of 1% to 3%, so there is an argument that the job is almost done. Similarly, the BoC’s latest business survey warned of a weaker demand outlook, which could further curb inflation.

All things considered, the central bank will most likely keep interest rates steady at this meeting, but could take a more dovish tone, gently opening the door to an easing cycle later this year.

Across the border, the main event in the United States will be the release of preliminary GDP statistics for the fourth quarter on Thursday. The forecast is that the US economy has grown at an annualized rate of 1.8% in the last quarter.

As for any surprise, a higher-than-expected GDP figure seems more likely than a disappointment. This is mainly due to the Atlanta Federal Reserve’s GDPNow model, which estimates 2.4% growth, much higher than the official forecast.

This model has a solid track record and if it proves right this time too, the dollar could benefit as traders reduce their bets on quick rate cuts by the Fed this year. The December core PCE price index will be released on Friday and could also be important in shaping Fed expectations.

Finally, in New Zealand, fourth quarter inflation statistics will be released on Tuesday.

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